TOKYO—A cut in a sovereign bond rating is seldom good news for a country, but in Japan's case, the recent downgrade by Standard & Poor's Ratings Services may actually benefit the country in the long-term by helping to raise rates of return and attract more international buyers, analysts say.
The credit agency last week lowered Japan's long-term sovereign-debt rating for by one notch to AA-, the first downgrade for Tokyo since April 2002, slamming political leaders for having no "coherent strategy" to tackle the nation's fast-worsening fiscal problems.
Japan's total government debt now equals 198.4% of its annual economic output, worse than the U.S.'s 92.8%, Germany's 75.7% and even Greece's 140.2% and Portugal's 82.8%, according to Japanese government figures.
If Japanese government bonds were widely held by non-Japanese investors, the S&P action could have caused severe damage to the economy. But since the assets are largely held by domestic players, analysts say the downgrade has had no negative impact.
In reaction to the move, the price for the lead March JGB futures contract rose slightly on Friday by 0.14 at 139.92 and the benchmark 10-year yield lost one basis point to 1.215%. As of 0557 Tuesday, JGBs were at 139.76 with a yield of 1.230%.
"Judging from JGB market moves, there was no negative impact at all," said RuiXue Xu, a rates strategist at RBS Securities.
An auction of 2.2 trillion yen ($26.84 billion) in 10-year JGBs also went smoothly on Tuesday, although there was some fall-off in demand from the previous auction on Jan. 6. The sale produced a yield of 1.24% based on the lowest price at the auction. Analysts said the lackluster demand was due to relatively high prices in the open market at the time, making the new issue less attractive, not any change in overall market sentiment following the S&P action.
"For the domestic market participants, the downgrade does nothing to their sentiment," said Mitsubishi UFJ Morgan Stanley senior fixed-income strategist Naomi Hasegawa.
Reaction has been muted in part because so much of Japan's debt market is held by big Japanese banks and insurers. Total foreign ownership constitutes just 6.4% of all outstanding bonds.
But with a relatively small--if loyal--set of purchasers, the Japanese government has been promoting greater foreign investment in the world's second-largest bond market.
Japan's Ministry of Finance is engaging in an aggressive overseas roadshow campaign, but it hasn't been able to attract a high level of interest, analysts say. Most recently, the ministry gave presentations in the Middle East and Europe.
The main issue JGBs are of little interest to non-Japanese investors because of the low yields, the analysts say. Compared with Japan's 1.2% return on its benchmark 10-year bond, the equivalent bonds in the U.S. yield 3.3%, while German 10-year bonds are at 3.2%.
"For foreigners, JGBs earn almost nothing," said Masahira Oda, a senior fund manager at Daiwa SB Investments, adding that the bonds should rise to the 3% level or higher to attract overseas investors.
Despite the cut, Japan's AA- status is still a relatively high rating. And as long as it remains at single-A or above, credit quality worries would not likely flare up as in Greece or Portugal, analysts say. That suggests that the government could tolerate two more cuts from S&P.
Such a reduction is seen as a possibility given that the Japanese government faces an uphill road to win support for fiscal reform to reduce the high issuance of bonds, which account for 48% of total revenue in the primary budget for the 2011 fiscal year starting in April.
"Japan may face another risk of downgrading if [Japan's Parliament] turns out to be slow on discussing consumption tax reform," said Nobuto Yamazaki, executive fund manager at DLIBJ Asset Management.
But Mr. Oda said that such a downgrade would be appropriate if it brings in foreign money.
"Even if other major rating agencies rush to downgrade Japan's credit, I say that's no problem at all as long as Japan keeps an A rating at least," he said.
